Netflix: ‘Domestic profits to fund international growth’

Online entertainment streaming service Netflix has reported second-quarter earnings more than quadrupled with programming such as the revival of comedy series Arrested Development attracting more subscribers. Company executives also suggested that domestic profits would fund international growth.

Netflix added 630,000 U.S. subscribers during the three months ending in June. That performance was slightly above the mid-range target set by Netflix Inc.’s management in April, but less than what many investors were expecting. The gains leave Netflix with 29.8 million US subscribers to a $7.99 monthly service that streams video to Internet-connected devices. Revenue rose 20 per cent to $1.07 billion.

Looking ahead, Netflix projected that it would add 690,000 to 1.49 million subscribers in the United States in the third quarter.

Outside the United States, Netflix added 610,000 streaming subscribers in markets such as Britain and Brazil. Q2 international contribution loss was lower than expected stemming from slightly higher member growth and lower than anticipated growth in content spending across multiple markets.

“We plan to grow our international content investments in Q3 slightly ahead of revenues. This growth combined with the losses associated with the launch of the Netherlands results in our guidance reflecting a q/q increase in our combined international contribution loss,” said the company in a letter to shareholders. “Netherlands is about half the size of Canada, and is a good opportunity for us as we prepare for entry into more markets. We’ll continue to expand in 2014 based upon the progression of our existing markets and on confidence in the expansion opportunities,” it confirmed.

In a subsequent video Q&A with selected analysts, Reed Hastings, Chief Executive Officer, said: “We are happy that net adds were higher than a year ago in our domestic business, and much higher on the international business. And so we are feeling quite good about the business.”

Asked whether he was still comfortable with the 60 million to 90 million ultimate market potential figure previously claimed, Hastings responded positively. “We are. We’re feeling very good about that. Because what happens is, by the time we get to 40 and 50, we get the content better and the service better. And so it’s not 60 or 90 for the current service, it’s 60 or 90 for the future service that’s much improved. That maybe a lot more originals and just incredible streaming.”

He also amplified Netflix’s international strategy. “Now what I said is the statements we have put in the long term letter, which is we are investing substantially all domestic profits in international expansion. And we think that’s very smart. If you look at our international growth, it’s tremendous. We think there is a huge opportunity around the Internet in the international markets and we’re investing for the long term in that. And I think we’ve been very clear in that for almost three years now.”